Time to wean off the (GST-free) milk

Written by Bob Deutsch, Senior Tax Counsel

The recent release of the Parliamentary Budget Office report into the Australian Tax System, highlights the incredible reliance placed upon individual income tax in Australia.

There is at least one way forward which is both logical and fair.

I refer to the rather perverse arrangement which currently exists, that basic food, health services, and education services are all GST free supplies. As most people are aware, this was part of the compromise deal reached by the former Howard Coalition government back in the late 1990s and is designed to ensure that the lower paid sectors of our community are not disadvantaged. This disadvantage would arise because a significant proportion of the income of lower paid workers available resources are dedicated to the purchase of such supplies. By excluding these supplies from the GST base, the objective of protecting those poorer sectors of the community is achieved.

However, this outcome is only secured by the rather perverse decision to ensure that when a person on $300,000 of taxable income purchases his or her milk, goes to the doctor of their choice, and sends their child to an expensive private school, none of these things are subject to GST. That is clearly absurd and is an outcome that should not be countenanced if we are serious about taxing the supply of goods and services as a revenue stream.

We are in effect, excluding 95% of the population that can afford to pay GST on these products, because we are trying to protect 5% who cannot.

The better way to achieve the objective is to impose GST on these three categories in respect of everyone, and then ensure an adequate compensation package is provided to the 5% that require protection.

The figures are quite extraordinary. According to Treasury office figures, revenue from these three sources would give rise to about $18 billion in additional collected GST. A compensation package to the million or so who are considered worthy of protection (ie low paid workers and pensioners and those on other selective social security benefits such as disability payments), could be in the order of $6 billion. That would translate into a compensation package of $6,000 per person, which would in turn reflect expenditure on these three sources of roughly $60,000 a year, per person. That level of expenditure by such people would be, with some limited exceptions, quite surprising. This level of compensation would be very generous indeed.

In other words, an additional $12 billion could be raised through taxing these three categories in full, and providing compensation to the 5% that really need it.

Imagine if this would have been done consistently over the 18 years since GST was introduced. Assuming a net lesser amount of only $10 billion per year, that would be an additional $180 billion in revenue over the last 18 years. How many hospitals and schools could that additional revenue have funded?

As the PBO report suggests, the amount of money that will be spent in future years on these three categories is increasing, and so the numbers will actually be larger than what I have suggested above.

By tying the compensation package to somewhere between a quarter and a third of the additional revenue raised, a very substantial source of additional Federal government funding would be available for sharing with the state and territory governments, as per the current Federal/State agreement.

In time, the additional revenue could also be used to reduce income tax rates and thereby reduce our reliance upon the income tax teat.

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